I think many of us who have taught for a few years believe that we are all here to teach both English and foreign culture too. Some countries have a very diverse population so it's important to show that. I know when I prepare PowerPoints with pictures of people with various skin color, hair color, hair style, eye colors, etc, I'd get funny remarks from time to time too. Some students really like the stereotypical blond hair blue eyed American.
For the most part, we probably take racism and racist comments way more seriously than some here. Since you are here to teach culture as well (assuming you want to), you might have to raise your voice a bit, maybe have the co-teacher translate, and say that its not okay. A solid "No, that is NOT okay to say about people" followed by a long silence might give off the impression of a very serious manner.
At the same time, make sure the kids know that making fun of someone is not much different than saying a bad word or cursing. Then, punish them for it. Everyone should be treated with respect. They can think all they want, but the second they say something out loud, that's when we got a problem. We wouldn't want these kids to turn out like Alexander Wa**** right?